Description

We developed a combined decision-analysis and logistic-regression approach for identifying high-risk claims at the Workers' Compensation Board of British Columbia (WCB). The early detection of such claims and subsequent intervention is likely to reduce their eventual cost and to speed up worker rehabilitation. High-risk claims are extremely costly to the WCB; for the approximately 321,000 short-term disability claims with injury dates between 1989 and 1992, high-risk claims accounted for $1.2 billion (64 percent) of the total payment of $1.8 billion, even though they constituted only 4.2 percent of the claims. We developed separate logistic regression models for each injury type. We found that the age of worker and number of workdays lost were predictive of high-risk status. We used decision analysis to develop a classification rule that has high out-of-sample predictive power. The WCB has incorporated these results in a claims-profiling scorecard, which identifies claims needing early intervention. We estimate that our method saves the WCB $4.7 million annually. (Decision analysis: applications. Financial institutions: insurance.) The Workers' Compensation Board of British Columbia (WCB) is a statutory agency responsible for the occupational health and safety, rehabilitation, and compensation interests of British Columbia's workers and employers. Created in 1917, the WCB's main objective is to help workers and employers to create and maintain safe workplaces and to ensure injured workers secure income and safe return to work. The WCB obtains the funds to make compensation payments and meet its other financial obligations from assessments levied on employers. In return, employers receive protection from lawsuits arising from work-related injuries and diseases. For waiving the right to sue, injured workers receive the right to benefits on a no-fault basis. In 2002, the WCB served more than 165,000 employers who employed about 1.8 million workers in British Columbia and spent over $1 billion (all figures in Canadian dollars) on compensation and rehabilitation. The main objective of our study was to develop a systematic approach to identifying short-term disability (STD) claims that pose a potentially high financial risk to the WCB. We refer to these claims as high-risk claims. We anticipated that by detecting high-risk claims early and subsequently intervening, the WCB would both improve claims management and reduce future costs associated with these claims. To discriminate between high-risk and low-risk claims, we combined decision analysis with logistic regression. Logistic-regression models use claim characteristics to assign a probability that a claim becomes high risk. Claims with sufficiently high probabilities are candidates for intensive claim-management intervention. We used decision-analytic methods to determine a threshold or cutoff point above which a claim is classified as high risk. Logistic regression, although not as widely used as linear regression, has been used in a variety of business and medical applications in which the goal was to find models that separate data into two groups. For example, Wiginton (1980) used logistic regression in credit scoring. The model allowed classification of credit applicants into high- and low-credit-risk groups. In a similar context, Johnson (1998) developed a logistic regression model to determine whether or not college students should be given credit for future purchases at a campus department store. Thompson (1985) used logistic regression to study outcomes in a community mental health program, while Lemeshow et al. (1988) determined factors affecting the probability of patients surviving to hospital discharge after admission to an intensive care unit. Recently, WCB managers have become increasingly aware that they could use quantitative tools to identify high-risk claims. Two unpublished internal studies motivated our research. Jessup and Gallie (1996) identified age of worker, gender, and nature of injury as factors that can be used for profiling high-risk claims, but they did not develop a model to quantify the risk associated with them. Fattedad and Charron (1999) studied the WCB's inventory of high-risk claims and concluded that a claim that exceeds 70 workdays lost is likely to become high risk. Claim Processing at the WCB A request for compensation from an injured worker for an injury or illness sustained at work is referred to as a claim. Whenever a claim corresponding to an injury or illness resulting from a person's employment causes temporary absence from work, the claim is referred to as a short-term disability claim or simply an STD claim. For STD claims, the WCB provides wage-loss payments for the workdays lost (STD days paid) and pays for the cost of hospitalization, treatment, prescription drugs, and necessary medical appliances. The vast majority (96 percent) of injured workers with STD claims recover from their injuries and return to work within a few months. Whenever a worker fails to recover completely from a work-related injury or illness and is left with a permanent partial disability or permanent total disability, the WCB ends the STD status of the claim and begins paying permanent disability benefits. Permanent disability benefits are called long-term disability or LTD benefits. Once an STD claim receives LTD benefits, it is no longer classified as an STD claim but as an LTD claim. If a worker incurs a permanent total disability, the WCB awards a periodic payment equal to 75 percent of his or her estimated average earnings for life. A worker who incurs permanent partial disability returns to work after his or her medical condition becomes fairly stable. In this case, the compensation is a periodic payment of 75 percent of the estimated loss of average earnings resulting from the impairment and is payable for life. The estimated loss of earnings is positively correlated with the percentage of disability--a quantity determined by the WCB's health-care professionals based on the physical condition of the worker. Generally, the lower the percentage of disability the less the estimated loss of earnings. To reduce the cost of LTD claims, claim managers and rehabilitation specialists focus on reducing the percentage of disability through early detection and intensive intervention; Head (1995) gives more details. For example, a lower-back-strain claim that may have resulted in a 25 percent permanent disability without early intervention may be reduced to a 10 percent disability through intensive early treatment and rehabilitative efforts. Converted and Nonconverted STD Claims We refer to the transition of STD claims into LTD claims as conversion. STD claims that become LTD claims are called converted STD claims. Conversely, STD claims that result in the injured workers' returning to work are called nonconverted STD claims. We assumed it would be beneficial to detect potential LTD claims early in their life cycles. To this end, we developed logistic regression models to detect STD claims that have a high likelihood of converting. The sample we used to investigate the conversion of STD claims consisted of all...